BUSI 620: Global Economic Environment
1. The Total Cost
-The Total Cost (TC) function shows the relationship between the total cost and the output (Q)
-Assume that the Total Cost function of a company is estimated to be TC = $180 + $70Q where Q is the output in units.
-What would be the Total Cost if the company produces 120 units?
2. The Average Cost
-The Average Cost (AC) or the unit cost is defined as TC/Q
-Use the information from #1, what would be the average cost for the company if it produces 120 units?
3. The Marginal Cost
-The Marginal Cost (MC) is defined as (change in TC) / (change in Q) = Δ TC/ΔQ
-What is MC when Q changes from 101 to 102 units? Use the following data:
4. The Demand Function
-The Demand Function shows the relationship between the Quantity Demanded and factors that affect the purchase.
-Assume the Demand Function faced by a firm is a linear form,
Qd = 7,000 – 15P + 0.4I
-Where, Qd is the Quantity of the product sold, P is the unit Price, and I is the per capita personal Income.
-Show the Demand Function, if I is known to be $25,000.
a. Qd = 7,000 – 15P
b. Qd = 10,000 – 15P
c. Qd = 25,000 – 15P
d. Qd = 17,000 – 15P
5. The Point Price Elasticity of Demand
-The Price Elasticity of Demand (Ep) is defined as the percentage change in quantity demanded of the product divided by the percentage change in its Price (P). That is
Ep = (change in Q/Q) / (change in P/P) = (Δ Q/Q) / (ΔP/P)
We have the following data:
-What is the Point Price Elasticity of demand when the price changes from $3 to $2?
a. – 2
b. – 0.5
d. – 1.5
6. The Linear Regression Model
-A Linear Regression Model for estimating the trend is:
Tt = T0 + bt
-Where Tt is the Value at Time t, T0 is the Value at Time 0, which is the Base period, b is the amount of growth each period, and t is the Time period.
-If we estimate the trend for a product sales from the first quarter of 2000 (t=1) to the last quarter of 2003 (t=16) to be:
Tt = 12+ 0.6t
-What is the product sales forecast for the third quarter of 2004 according to the above estimated trend equation?
7. The Present Value
-The Present Value (PV) of a project is given by:
PV = Σ Rt / (1+k)t = R1 / (1+k)1 + R2 / (1+k)2 + … + Rn / (1+k)n
-Where Rt is the estimated net cash flow from the project in each of the n years considered, k is the risk-adjusted discount rate, and Σ refers to “the sum of.”
-If k is 10%, R1=$250,000, R2=$300,000, R3=$350,000, and n=3, what is the present value of the project?
8. The Expected Profit
-The expected profit is given by
E(π) = Σ πi * Pi = π1* P1 + π2 * P2 + … + πn * Pn
-Where πi is the profit level associated with outcome i, Pi is the probability that outcome i will occur, and i = 1 to n refers to the number of possible outcomes.
-Use the following data to calculate the expected profit for a company:
Profit Probability of occurrence
9. The Equilibrium Price and Quantity
-If the Demand (QD) and Supply (QS) curves for a product are:
QD = 625 – 35P
QS = 175 + 15P
-The Equilibrium Price and Quantity will be the Price and Quantity when:
QD = QS, that is 625 – 35P = 175 + 15P
-Find the Equilibrium Price and Quantity for this product.
a. P = $9, Q = 310
b. P = $8, Q = 295
c. P = $10, Q = 325
d. P = $6, Q = 265
10. The Average Cost Equation
-The equation for the Total Cost (TC) is given by:
TC = 10 + 4Q + 3Q2 + 5Q3
-The equation of the Average Cost AC (= TC/Q) would be:
a. 10 + 4Q + 3Q + 5Q2
b. 10 + 4Q + 3Q + 5Q2
c. 10 + 4 + 3Q + 5Q2
d. 10/Q + 4 + 3Q + 5Q2
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